FINANCIAL MANAGEMENT

HANDOUT #01 – BASIC CONCEPT OF FINANCIAL MANAGEMENT & FINANCIAL MARKETS

1) What is Financial Management?

Answer: Financial Management is the process of planning, directing, organizing, controlling and monitoring of the
monetary resources in order to achieve objectives and goals of the business. The financial managers are responsible for the
management of these monetary resources of the business.

Financial Management is a subset or a portion of Management Accounting in which refers to that area of accounting work
concerned with providing advice and technical assistance to help clients improve the use of their resources to achieve their
goals.

Financial Management focuses on the investing excess fund and financing the needed fund while the other side of the
Management Accounting focuses more on the operational side of the business (e.g., increasing sales, decreasing operating
expenses).

Financial Management answers the questions:

1. Whom, where, when and how to invest excess funds with the highest return.
2. Whom, where, when and how to obtain needed funds with the lowest cost.

Financial Accounting VS. Management Accounting (Financial Management)

Areas of Comparison Financial Accounting Management Accounting

Primarily for external users Primarily for internal users

1. User of report
(i.e., investors and creditors) (i.e., management)

2. Reporting guidelines PFRS / PAS None

3. Frequency of report Periodically (e.g., annually, monthly) Whenever needed

Mandatory (e.g., submission of report

4. Necessity Optional
is required by SEC, BIR)

5. Content of report Historical data Future–oriented (Forecasts)

Business as a whole, summarized Particular segment, extensive and

6. Coverage of repot
report detailed report
Internal information (past transaction Internal and external (Forecasts
7. Source of data
of the company) includes industry trends)

8. Emphasis of report Reliability Relevance

Cost Accounting – is a subset of both financial accounting & management accounting. Cost accounting system is utilized
for internal reporting for use in management planning and control of costs, and for external reporting to the extent its
product – costing function satisfies external reporting requirements.

2) What are the different kinds of business organization?

Answer:

Sole proprietor – is regarded as the simplest form of business organization. This is owed by an individual, known as the sole
proprietor, who has the full authority in managing the asset of the business.

Partnership – is a contract of two or more persons who bind themselves to contribute money, property or industry to a
common fund, with the intention of dividing the profits among themselves.

Corporation – is an artificial being created by the operation of the law, having the right of succession and powers, attributes
and properties expressly authorized by law or incident to its existence.
3) What are the differences between sole proprietorship, partnership and corporation, their advantages and disadvantages?

Answer:

Sole Proprietorship Partnership Corporation

Shareholders (for profit and stock company)
1. Owner Proprietor/Manager Partners Members (for non profit and non stock
company)

2. Number of owners One Two or more One or more

Not by operation of law Not by operation of law By operation of law

3. Manner of establishment
(No registration to SEC) (No registration to SEC) (Registration to SEC is required)

Extend beyond the personal asset of the Extend beyond the personal asset of the Do not extend beyond the personal asset of the
4. Liability to creditors
proprietor partners shareholders

Not transferable
5. Ownership Transferable Transferable
(Consent of partners is required)

Exempted from tax Taxable

6. Taxation (The proprietor will shoulder the tax, not the Taxable (with exception) (Both the business and the owners will be
business) taxed)

7. Distribution of profit to owners By withdrawal By withdrawal By dividends

Perpetual
8. Life Limited Limited
(forever)

9. Availability of capital Limited capital (resource) Large capital (resources) Larger capital (resources)

Corporation will not be dissolved if any of the

Sole proprietor will be dissolved if the
10. Dissolution Partnership will be dissolved if one partner dies shareholder dies
proprietor dies
(right of succession)
4) What are the different types of corporation?

Answer: This is a document containing basic information about the company such as:

Type 1 Type 2
1. As to number of Corporation aggregate – owned by more than One person corporation – owned by one
owner one shareholder person

2. As to religious Ecclesiastical Corporation – incorporated for Lay Corporation – incorporated other than
purpose religious purposes religious purposes

3. As to charitable or Eleemosynary Corporation – incorporated for Civil Corporation – incorporated for

not charitable purposes business or profit

4. As to country of Domestic Corporation – incorporated under Foreign Corporation – incorporated under

creation Philippine law foreign law

5. As to legal right to De jure – exist in fact and in law De facto – exist in fact but not in law
corporate existence

6. As to extent of Close Corporation – the ownership is not open Open Corporation – the ownership (shares)
membership to the public and cannot be purchased by is for sale in the public (traded in the stock
anyone exchange) in which anyone with the
capacity can buy the ownership

7. As to relation to Parent Company – owner of subsidiary Subsidiary Company – owned by parent

other corporation company (50% or more) company

8. As to existence of Stock Corporation – capital is divided into Non-stock Corporation – no authorized

stocks shares of stock capital stock

5) Who are the financial managers and what are their roles in the company?

Answer: Financial Managers are employees who are responsible for managing the monetary resources of the corporation in
order to maximize firm’s profit. They are also responsible for dealing with the different financial markets such as stock market
or bond market and with financial institutions like banks.

Generally, the Financial Managers are:

1. Board of Director – they are direct owners and are elected by the shareholders to manage the corporation. They are
charged with ultimate governance of the corporation.

2. Chief Financial Officer – (a.k.a. Vice President of Finance) who has responsibility over financial planning and formulation
of financial corporate strategies. Under his supervision are the Treasurer and the Controller.

3. Treasurer – one who focuses on the financial aspect of the corporation; wherein he has the responsibility on raising and
managing the capital or funds of the company. Moreover, he is responsible for transacting and maintaining good
relationship with various banks and the formulation of the company’s credit polices and collection.

4. Controller – one who focuses on the accounting and budgeting aspect of the corporation; he is responsible for the custody
of financial records, preparation of the financial statements, and interpretation of financial data. Moreover, he is
responsible for the management of the budget for the efficient usage of fund.
6) What is a Financial Market?

Answer: There are times when firm’s capital is not sufficient to support its investments and operational activities wherein
there is a need to raise additional funds through the utilization of financial markets and financial institution (a.k.a. financial
environment). Financial markets are the place where financial asset such as shares of stock and debt securities are issued and
traded. Financial market will serve as the bridge between the seller (those are in need of funds) and the buyer (those having
excess fund). Common types of financial markets are:

a. Stock market

This is a market where equity securities are being issued and traded. In this market, the stockholders may sell their stock
investments or the firm may issue additional stocks if the stock price is overvalued.

b. Bond market

This is a market where debt securities are being issued and traded. This is also referred the fixed income market because
the investors or so called bondholders receive fixed interest payments from the investments assuming they will hold the
bond until maturity or on a longer period of time. Bond market is divided into two categories, namely:

1. Money market – This is market where short-term debt with maturities of one year or less are used as a source of
financing. Common example is money market placement, commercial papers and treasury bills which is issued by
the government with maturity of one year or less.

2. Capital market – this is a market where long-term debt and equity securities are involved, for financing. Common
example are:

 Treasury notes – debt securities issued by government usually with maturity of one to five years.
 Treasury bond – debt securities issued by government usually with maturity of more than 5 years.

Physical market

Is also known as real asset or tangible markets because the products involved are real estate, property, plant and equipment,
inventories, etc.

Spot market

This is a market where assets or goods are sold for and delivered on the spot or on the same day. Thus, determination of
price and delivery of goods is immediate.

Future market

This is a market where future contract are sold. A future contract is a contract that gives the purchase an obligation to buy
and the seller the obligation to sell at a predetermined price at a future date.

Private market

This is a market where negotiation and agreement takes place personally between two parties. Hence, making the
contract unique or tailor-made.

Public market

This is a market where a security or contract with standardized features are being traded and held by individuals.
7) What is a Financial Intermediaries?

Answer: This are organizations that provide financing to the individuals, corporation or other organizations by raising funds
or money from investments.

1. Mutual funds – the investment company pools money from the investors then invests these accumulated amount
in a portfolio of securities whether equity, debt or money market. In mutual fund, the investors purchased shares
of the investment company thereby giving the investor the right to receive dividends.

2. Trust funds – the investment company sells units of investment to the investors to accumulate a trust fund. The
trust fund may be invested also in equity, debt or balance of equity and debt.

3. Pension funds – these are pooled contribution from the employees or from the employers that serves as the
investment plans for the retirement benefits of the employees. The accumulated funds may be invested in shares
of stock or in a mutual fund in order to increase the amount of pension received by the retirees.

4. Financial institution – this is a kind of financial intermediary that provide additional financial services other than
pooling and investing of funds. One type of financial institution is a bank which may serve as debtor and creditor at
the same time by accepting cash deposits from savers and providing loans to individual or other firms.

8) What are the stock market transactions?

Answer:

1. Initial Public Offering – are markets where the stocks of a closely held corporation, going public, are offered to the
public for the first time.

2. Seasoned Offering – is the issuance of additional shares of stocks of the company after its first time offering in order
to finance the capital budget or to improve capital structure.

3. Primary market – selling of new shares of stock to the investors directly from the corporation.

4. Secondary market – selling of an existing shareholder to another shareholder (not from the corporation).